Thursday, January 19, 2017

Compensation awarded by MACT not ‘income’ and cannot be subjected to TDS and Income Tax: Madras HC

FULL JUDGEMENTIn a very significant judgment, the Madras High Court has held that the compensation awarded by the Motor Accident Claims Tribunal (MACT) to accident victims cannot be subjected to TDS and Income Tax since the compensation and the interest awarded therein does not fall under the term ‘income’ as defined under the Income Tax Act, 1961.

Referring to a Himachal Pradesh High Court judgment wherein it had quashed circular issued by Income Tax Department ordering deduction of Income Tax the award amount and the interest accrued on the deposits made under the order of the Court in Motor Accident Cases, Justice M.V.Muralidaran said that purpose of granting compensation under the Motor Vehicles Act is to ameliorate the sufferings of the victims so that they may be saved from social evils and starvation, and that the victims get some sort of help as early as possible.

The Court said “if the law has to be interpreted so technically and rigidly whereby which a family of an individual who could have possibly lost his life or limbs in an accident has to pay TDS on the interest that has accrued on the compensation amount, will the law be doing a service or disservice to the victims?”

SOCIAL WELFARE LEGISLATION TO PREVAIL IF IT IS CONFLICT WITH TAXATION LEGISLATION

The Court further observed “If there is a conflict between a social welfare legislation and a taxation legislation, then, this Court is of the view that a social welfare legislation should prevail since it subserves larger public interest. The Motor Vehicle Act is one such legislation which has been passed with a benevolent intention for compensating the accident victims who have suffered bodily disablement or loss of life and the Income Tax Act which is primarily intended for Tax collection by the State cannot put spokes in the effective and efficacious enforcement of the Motor Vehicles Act. In fact, if one might deeply analyse, it could be seen that there is no direct conflict between any provisions of the Income Tax Act and the Motor Vehicles Act and it is only by the interpretation of the provisions the concept of compulsory payment of TDS has crept into the realm of compensation payment in Motor Vehicle Accident cases.”

The Court added that there is no direct conflict between any provisions of the Income Tax Act and the Motor Vehicles Act and it is only by the interpretation of the provisions the concept of compulsory payment of TDS has crept into the realm of compensation payment in Motor Vehicle Accident cases.

COMPENSATION IS NOT INCOME

Rejecting the contention that, compensation is to be treated as income, the Court held “Compensation cannot be categorized or even described as income as it has already been stated that the intention of the legislature in awarding compensation to the victims of Motor Accident cases is to restitute them and rehabilitate them.”

The Court further remarked “The Motor Vehicles Act has undergone a sea change and the purpose of granting compensation under the Motor Vehicles Act is to ameliorate the sufferings of the victims so that they may be saved from social evils and starvation, and that the victims get some sort of help as early as possible. It is just to save them from sufferings, agony and to rehabilitate them. We wonder how and under what provisions of law the Income Tax Authorities have treated the amount awarded or interest accrued on term deposits made in Motor Accident Claims Cases as income.”

Referring to laws of foreign countries, the Court said “If we look at other jurisdictions like Australia, Unites States and United Kingdom, even there, the matters where a person has suffered an injury or there has been a loss of life and a compensation has been paid in lieu of that, then it has been held by the Courts that there cannot be any Tax deduction on such compensation. The underlying basis behind this is that a person who suffers a loss cannot be asked to part with the solatium he receives since it is the only remedy he has been provided with by the law.”